MARKET WATCH: Energy prices rally on optimistic hopes for Europe

Energy prices rallied Oct. 10 with crude oil climbing 3% in the New York market in yet another surge of optimism that the European economic crisis may yet be brought under control.

“Oil staged a powerful rally yesterday amid the soaring euro and equity markets as risk appetite returned on the renewed drive to resolve the euro-zone’s debt crisis,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “However, oil products failed to catch up with crude, as normally happens during sharp price moves. Also, sentiment toward product cracks softened after news that [Royal Dutch] Shell was starting up its refinery in Singapore. The term structures for Brent and West Texas Intermediate rose further, on tight crude supplies.”

However, commodity prices appeared to be slightly lower in early trading Oct. 11 on concerns Slovakia might block the proposed expansion of Europe's financial rescue program.

“Malta voted to accept the European Financial Stability Facility [Oct. 10]. It is now all left in the hands of Slovakia, and that final passage is going to be a tough side,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “Today Greece also has to issue €1 billion of 6-months bonds to pay the €2 billion they need to pay back Oct. 14 on maturing bonds. The euro broke back the 1.35 line [Oct. 10] and was very strong, but the London Interbank Offered Rate [the most commonly used benchmark to determine the interest rates for the mortgage industry and banks] was slightly higher and not showing greater optimism about the European banking liquidity.”

Jakob noted US President Barack Obama spoke by telephone with the British and French government executives Oct. 10 about the necessity of curbing the euro-zone debt crisis. “Maybe someone should brief the White House that the UK is not part of the euro-zone,” he suggested. “Anyway, [German Chancellor Angela] Merkel and [French President Nicolas] Sarkozy [the main powers of the euro-zone] coming empty-handed out of the weekend did not impress the European markets; they finished higher, but it was the US markets pulling Europe higher, not the other way around.”

Meanwhile, the meeting of European Union heads of states has been pushed back to Oct. 23 “as it will take more time for the Troika [the European Commission, the International Monetary Fund, and the European Central Bank] to publish its assessment on Greece, Jakob said. “That’s the official justification, but then we note that the European Banking Authority is apparently very busy recalculating the European banks stress test using mark-to-market values. The US stock market might have had a very strong rally in low volume yesterday (Columbus Day); we still want to be on the cautious side when using mark-to-market values [as] a stress-test for the European banking sector.”

Jakob said, “The flat price of oil should continue to be driven by variations in the Standard & Poor’s 500 index, although in Brent it is starting to approach a key resistance line at $110/bbl. The Brent November contract expires Oct. 14 and the front backwardation has greatly increased in the last few days in convergence to the spreads in the previous expiry. Since then, however, we have gone deeper into European refining maintenance, deeper into renewed crude oil exports out of Libya, premiums for Forties have dropped by about $1.50/bbl, West African premiums have stalled, and refining margins are starting again to erode due to the flat price gains in crude oil.”

OPEC outlook

In its latest monthly report, the Organization of Petroleum Exporting Countries reported its reference basket of 12 benchmark crudes recovered in a volatile market during September with prices of $102-112/bbl, only to drop below $100/bbl in early October, its lowest level since February. It has since recovered some; OPEC’s basket price gained $1.45 to $104.67/bbl on Oct. 10.

On a monthly basis, the OPEC reference basket rose $1.29 or 1.2% in September to average $107.61/bbl in a market dominated by economic uncertainties around the globe, particularly in Europe, due to Greece’s debt problems and the fears of contagion to other countries.

“All basket components recovered in September except Venezuelan crude Merey, which dropped a further 69¢ to average $92.78/bbl, the lowest since the $87.51/bbl of last February,” OPEC officials reported. The recovery in OPEC’s basket price that month was driven essentially by Ecuador’s Oriente crude, which jumped $5.91/bbl or 6%, as well as by light African crudes.

“Algeria’s Saharan Blend and Nigeria’s Bonny Light continued to benefit from the combination of stronger demand from Asian buyers and the lack of light grades as Libyan crude remained absent from the market. African light crudes were also supported by strong refining margins in Europe. Nigeria’s Qua Iboe benchmark was assessed up to dated Brent plus $3.90-4.10/bbl in late August,” OPEC reported.

However, the basket price recovery slowed in the second half of September as respective gains of the 3rd and 4th weeks fell by 96¢/bbl and 10¢/bbl.

In early October, crude prices declined further amid a deteriorating economic outlook and stronger US dollar. In the New York market, the front-month crude futures contract fell to a 10-month low in September and dropped below $76/bbl in the first week of October. Similarly, in early October, the ICE Brent front-month contract dropped below $100/bbl for the first time since January.

OPEC’s outlook for world economic growth remains unchanged at 3.6% for 2011 but was revised down to 3.7% for 2012. “At least for now, the deceleration of global output seems to have stabilized, although many risks remain, particularly in the euro-zone,” OPEC officials reported. The US is forecast to grow at 1.6% in 2011 and at 1.8% in 2012. The euro-zone is now expected to expand by 1.6% in 2011, but by only 0.8% in 2012. Japan’s economy is expected to recover by 2.4% in 2012, after a contraction of 0.8% in 2011.

However, OPEC said, “The magnitude of the recovery remains uncertain. Growth levels in the developing countries remain relatively high, although a slow-down effect from the policy measures has started to have an impact. While China remains unchanged at 9% for 2011 and 8.5% for 2012, India’s forecast has been revised lower to 7.6% for both 2011 and 2012.”

The group’s forecast for world oil demand growth was been revised down by 180,000 b/d to 900,000 b/d this year. “Uncertainty in the world economy has dimmed the picture for 2011, particularly in the Organization for Economic Cooperation and Development region. Chinese oil demand is bound to uncertainty because of new government policies aimed at reducing transport fuel use. India’s increase in retail prices is expected to play a major role in dampening oil consumption in the coming year. Due to the weakening economic outlook, the forecast for world oil demand growth in 2012 has been revised down to stand at 1.2 million b/d,” OPEC said.

Non-OPEC oil supply is forecast to increase by 400,000 b/d in 2011, a downward revision of 160,000 b/d from the previous month mainly due to lower-than-expected supply from Canada, the UK, Brazil, and Azerbaijan. In 2012, non-OPEC oil supply is expected to grow 800,000 b/d, higher than in OPEC’s previous report, supported by anticipated growth in Brazil, Canada, Colombia, and the US. OPEC NGLs and nonconventional oils are expected to increase by 400,000 b/d in 2012, in line with the current year’s growth.

In September, total OPEC crude production averaged 29.9 million b/d according to secondary sources, a decrease of 77,000 b/d from the previous month.

Demand for OPEC crude in 2011 is estimated to remain at 29.9 million b/d, unchanged from the previous assessment and 100,000 b/d higher than last year. In 2012, the demand for OPEC crude is projected to average 29.9 million b/d, down 100,000 b/d from the previous report to no growth over the current year.

Energy prices

Both the November and December contracts for US sweet, light crudes topped $86/bbl in intraday trading Oct. 10 on the New York Mercantile Exchange. But the November contract closed at $85.41, up $2.43 for the day while the December contract was up $2.42 to close at $85.59/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.43 to $85.41/bbl.

Heating oil for November delivery increased 4.51¢ to $2.90/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 4.77¢ to $2.70/gal.

The November contract for natural gas regained most of its loss from the previous session, up 6¢ to $3.54/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., surged forward by 7.4¢ to $3.45/MMbtu, more than negating its previous loss.

In London, the November IPE contract for North Sea Brent increased $3.07 to $108.95/bbl. Gas oil for October jumped $21.75 to $918/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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